The Uncertainty Mandate

It seems like the only thing Americans are certain about these days is uncertainty.

Most immediately, of course, people wonder what the 112th Congress will do and how President Obama will respond. But the uncertainty predates the election and undoubtedly affected its results. Bond markets have no idea whether the new $500 billion-or-so round of quantitative easing, expected to be announced today, will help to jumpstart the U.S. economy now or just stoke inflation later. Housing experts fret that the current foreclosure-fraud crisis could lead to a cataclysmic second nationwide decline in real-estate values. Economists worry about the October unemployment rate, due to be released on Friday. And consumers are unclear about whether the divided Congress will be able to come to a compromise on the Bush tax cuts, or whether virtually every American household will see the government eat more of their paycheck in a mere 58 days.

Republicans cite uncertainty as a central problem keeping businesses from hiring, and holding the country back, and promise to fix it. Indeed, Rep. John Boehner of Ohio, the next Speaker of the House, has placed the market's hesitancy at the center of his economic platform. He argues that uncertainty stems from the United States' crushing debt load and the government's imposition of new regulations on businesses. And he vows to stop "Washington Democrats' out-of-control spending spree and job-killing policies" and to slash deficits to "help end the uncertainty," and thereby to help the economy.

But will Republicans—or would any Congress—be able to reduce uncertainty? There, the answer is probably no.

Advertisement

Republicans can simplify taxes and halt any new rules-writing, reducing regulatory uncertainty, and there is evidence that the markets will like it, for some time at least. But the nation's uncertainty contains multitudes and extends far beyond taxes and rules, say economists. It is not specific to election outcomes or bond sales or even what is happening in Washington. It is a general insecurity related to the pace of the recovery and continued economic distress.

Peter Diamond, a pending appointee to the Federal Reserve Board, clarified the point last week, explaining "uncertainty" as a pervasive anxiety about the direction of the economy rather than a specific concern about, for instance, the outcome of the tax compromise. "What's critical is not right now the functioning of the labor market, but the limits on the demand for labor coming from the great caution on the side of both consumers and firms because of the great uncertainty of what's going to happen next," he told NPR.

The point is not necessarily political. Mohamed El-Erian, the bond guru and chief executive officer of PIMCO, argues much the same. Many "companies and households explain the divergence between their will and their wallet by pointing to regulatory and tax uncertainty, the absence of a clear macroeconomic vision, and the notion that the Obama administration is 'anti-business,' " El-Erian wrote in a post-election analysis in the Washington Post. But ultimately, he says, the big uncertainty is about supply and demand. For "too many segments of our society, the ability to spend and hire is constrained not by questions of willingness but, rather, by stubbornly high unemployment, annihilative debts and, in some cases, concerns about losing one's home."

There are data to support these views. Consider, for instance, the surveys of the National Federation for Independent Business, a small-business lobbying group that generally leans right. The NFIB conducts exhaustive monthly polls of business owners. And for months, while small businesses have cited government intrusion into their affairs as a problem, they have overwhelmingly ranked poor sales as the primary worry.

Advertisement

Big businesses have different, but related, concerns. They have already shed enough employees to return to profitability. But they now need to see demand recover in order to start investing and expanding again. A report released last week by Moody's Investor Services shows that nonfinancial businesses are hoarding nearly $1 trillion in cash, due to worries about the direction of the economy and a lack of safe and worthy investments. The companies' balance sheets are in "good shape," the analysts note. But they are not planning to actually spend their billions anytime soon, at least not on anything except stock buy-backs and mergers.

"Companies are unlikely to spend their cash on expansion and hiring until there is greater certainty about the direction of the U.S. economy," the report says. "In the meantime, it provides a buffer against further weakness."

There is little evidence that Republicans, like Democrats, can do much at this point to ease uncertainty about the direction of the economy. Things are getting better, even if the pace is slow and tentative. A few months of bolstered job growth, above-trend business confidence, and higher-than-expected consumer spending reports would certainly help. But for now, be sure that uncertainty is here to stay—regardless of who controls Congress or the White House.